Refinancing Before, During, or After a Divorce: What To Know (2024)

Should you refinance before, during, or after a divorce? With nearly 700,000 couples separating every year in the United States — many of them homeowners —it’s a common and important question to ask.

Refinancing your mortgage before filing for divorce is no different than a regular refinance. This approach allows one spouse’s name to be removed from the mortgage, or for one or both parties to borrow home equity as cash to help split assets when they do file for divorce.

While it’s possible to refinance during or after a divorce, you’ll need to be prepared for some extra red tape.

Why Refinance When Getting Divorced?

For divorcing couples, refinancing can clear the path to separation without dealing with lingering financial ties. With much of the legal process of divorce focused on splitting assets, settling ownership and financing for what is most couples’ biggest shared asset can help both parties avoid a potentially major and contentious obstacle.

In addition to helping untangle shared finances, refinancing a mortgage can help improve both parties’ financial standing as they move forward.

“After a divorce, refinancing your home can be a strategic move to divide property assets and financial obligations,” says Laura Wasser, a divorce attorney based in Los Angeles and chief of divorce evolution at Divorce.com. “This step can safeguard your credit by taking a spouse off the mortgage or help in acquiring a spouse’s portion of the home. Yet, it comes with its own set of hurdles. The individual retaining the home needs a robust credit score and sufficient income to secure the loan independently.”

Here are five reasons to refinance your mortgage when getting a divorce.

1. To remove your spouse from the mortgage

If you’re keeping the home after the divorce, refinancing lets you remove your spouse’s name from the mortgage. However, refinancing won’t automatically remove your spouse’s name from the deed. Talk to your lawyer about confirming that only you have a claim to the property.

2. To remove yourself from the mortgage

If you’ve agreed to let your spouse keep the home, it’s important to get your name off the mortgage as quickly as possible. You are responsible for the mortgage as long as your name is on the loan. That means if your e­x-spouse misses any payments, it could harm your credit score.

3. To borrow equity to buy out your partner

If you’re keeping the home after the divorce, your settlement might require you to buy out your partner’s share of ownership in the property. You may be able to avoid paying that expense out of pocket if your home has equity you can borrow with a home equity line of credit, home equity loan, or cash-out refinance. Once you’ve used your share of the equity to buy out your partner’s share, you would assume all remaining debt on the home.

4. To buy a new home

If your fresh start involves buying a new home, you need to get your name off the shared mortgage as quickly as possible. As long as your name is on the shared mortgage, the monthly payment on that loan will count toward your debt-to-income ratio.

Mortgage lenders calculate your DTI ratio to gauge how much income you have free after paying your debts. Your DTI ratio will take a hit if you’re still listed as responsible for the shared mortgage, meaning you may struggle to get a mortgage for a new home. Refinancing to remove your name from the existing mortgage will reduce your DTI ratio and better reflect your financial situation going forward when you apply for a new home loan.

5. To access home equity

If your home’s property value has increased dramatically, there could be a good deal of cash available on the other side of a refinance. The spouse giving up the house also will be giving up the current and potential market value of the home, as well as their share of the home equity. A cash-out refinance can make available enough money to split the assets as needed, even if the home won’t be sold as part of the divorce settlement.

Refinancing Before a Divorce

Refinancing your mortgage before separating or filing for divorce is the easiest option. Since you are still legally married, no special conditions apply to the refinance, which makes it easier to remove one spouse from the loan. It also can make the divorce easier if you and your spouse decide how to split your assets, including your home, before initiating the legal process.

Pros and cons of refinancing before getting a divorce

Here’s a look at what to consider when timing your refinance around your divorce:

Refinancing During a Divorce

Refinancing a home during a separation or divorce is more complicated because of the legalities involved — especially if one partner is uncooperative. Once you report your separation to a mortgage lender, the lender can work with you only if you’re able to provide a written agreement as to how assets are being divided.

Also, if you have a low credit score or a lot of other liabilities, it may be more difficult to refinance at an affordable interest rate.

Pros and cons of refinancing during a divorce

Here’s what to consider when starting the refinancing process during your divorce:

Refinancing After a Divorce

Refinancing a shared mortgage after you’ve finalized a divorce is even more complicated.

Once an agreement has been reached regarding how much one party will pay in alimony, maintenance, or child support, a mortgage lender will include those payments in its DTI ratio calculation.

If the spouse keeping the home is making support payments, their post-divorce higher DTI ratio may make it more difficult to refinance, and they may have to pay a higher interest rate.

If the spouse receiving the support is keeping the home, the lender will consider the support payments as income, and include them in its DTI ratio calculations. Some lenders may require you to receive alimony or other support payments for six months before they will consider it as income in your DTI ratio.

If you can’t refinance after a divorce, you could ask your spouse for more time to refinance as part of the settlement. Under this type of agreement, one party can agree to make all mortgage payments on time until they improve their credit score or financial standing enough to refinance.

In other cases, one party may agree to sell some of the assets they receive in the divorce settlement to buy out their spouse’s equity. Additionally, one party may trade their interest in shared assets, such as retirement accounts, for the other partner’s home equity. Either option can improve your finances enough for a lender to approve your refinance application.

Finally, selling the home may be the most realistic option if you don’t expect you can refinance any time soon.

“If you delay refinancing until the divorce finalizes, you might face higher interest rates,” Wasser says. “If a refinance isn’t feasible for both parties, other options like selling the home or maintaining the current mortgage might be necessary, leaving both individuals accountable for the debt. Navigating this decision is intricate and necessitates legal advice tailored to the specific situation.”

Pros and cons of refinancing after a divorce

Here’s a glance at where refinancing after a divorce leaves you:

Alternatives to Refinancing While Getting a Divorce

Do you have to refinance after divorce? While refinancing is considered one of the quickest and easiest ways to split a property asset when divorcing, it’s not the only option. If you’ve used a mortgage refinance calculator and the results suggest you need other options, here are some alternatives for handling a shared home during a divorce.

Mortgage assumption

When assuming a mortgage, one party agrees to take over all mortgage payments and financial responsibility for the home. To approve an assumption, a lender will verify that the person taking over the home has the income, DTI ratio, and credit score needed to get a mortgage on their own. Additionally, homeowners must be current with mortgage payments for lenders to consider this option.

Sell the home

If both parties would simply like to move on, selling the home may be an easier option that helps them to sever ties fully. In most cases, both parties agree to list the home by a certain date. Revenue from the sale is then split. Selling a home is sometimes preferred in cases where a home has accrued a good deal of equity, because both parties can use the proceeds to buy new homes.

Wait to refinance

If refinancing isn’t in the cards for you right now, refinancing after divorce may help you get more favorable terms. However, the party keeping the home will need to take steps to remove the other person from the mortgage and title to untangle them from liability. This move isn’t without risk.

While you may be holding out for lower interest rates, there’s no guarantee that rates will decline. Other factors may affect your home’s value —either up or down. If your home’s value declines, you will have less equity to benefit from when doing a cash-out refinance or borrowing your equity.

FAQ: Refinancing Before, During, or After a Divorce

Check out the answers to these frequently asked questions about refinancing around a divorce.

The Bottom Line on Refinancing Before, During, or After a Divorce

Refinancing can be an important tool for helping divorcing spouses to separate assets without sacrificing any of the equity they’ve gained through property ownership. If one party intends to stay in the home, refinancing while you’re still married can help to create a clean split that allows the other party to be free from financial liability even before the divorce is finalized. Refinancing during or after divorce is more difficult. If you can’t refinance after divorce, you’ll need to work out an option with your former spouse.